Global iron ore price forecast (July 2013)

Metal Expert Consulting continues to publish open quarterly reports to show its own understanding of the iron ore market development until 2015 and compare it with the consensus forecast of investment companies and analysts.

Prices in the world market for iron ore stayed on the downward track throughout Q2. Whereas in April Australian and Brazilian fines were available to China at $137/t and $145/t CFR, in June spot prices fell to $113-120/t. At the beginning of July they gained $5-10/t but are yet to reach the levels recorded in May.

The decrease was caused by a number of factors directly connected with the growth slowdown in China, the key consumer.

The declining rates of China’s economic development should be mentioned first: stagnation of foreign demand for Chinese production (in June exports lost 3%, the biggest fall over the recent years, whereas the forecast suggested a rise of 4%), downturn in the construction sector, changes in government regulations (stricter monetary policy brought about an increase in interest rates in June, so investment activity is expected to fall in the country). Now there is a necessity of a soft or hard landing for the economy, which strongly depends on exports and has been increasing by 10% per year, so that the focus can be shifted onto development of domestic consumption.

Changes are taking place in China’s metallurgical sector due to the economic deterioration in the country. According to worldsteel.org and mysteel.net, the leading industry sources, pig iron production in China grew by 6% on the year-ago period to 358 mt in January-June. At the same time, global pig iron output excluding China decreased by 2% to 226 mt, which is why the share of China in the world production topped 61% for the first time over the past years. The growth of China’s pig iron capacity utilization rates slowed down visibly on the previous quarter in Q2; in June pig iron output fell by 5% in the country (the biggest drop over the recent year).

During six months, iron ore production in China was increasing at the same pace as its consumption was (+7%, to 64.6 mt). Customs statistics show iron ore imports to the country added a mere 4% on the same period a year ago, and the trend observed in China in the recent years is towards a decline in purchases from abroad. In June imports went down by 9% on May to 62 mt, the lowest level over four months.

Considering the negative changes in China’s economy and actual downturn in prices, the leading investment banks and industry analysts have revised their forecasts for raw materials, iron ore in particular.

See below for the consensus forecast of iron ore price changes in the short- and medium-term outlooks that Metal Expert Consulting has made based on 33 reports by industry and investment analysts. To get the forecasts, we have adjusted all the available prices to a common benchmark basis – the CFR China price for Australian 62% Fe fines. The forecasts for April-July have been used. As an exception, we have also considered some forecasts produced by investment banks for earlier periods (the reason is their high degree of accuracy, as the results of Q1-Q2 show).

Some 15 of the above mentioned companies provide no long-term forecasts about iron ore prices, therefore the consensus forecast, the maximum and minimum forecasts for the period have been prepared based on 18 indicators.

The minimum iron ore price forecast is offered by Credit Suisse, and in its July report the company emphasizes the probability is strong the raw material supercycle will come to an end as early as 2013-2014. The most optimistic forecast is the one made by IHS Global Insight.

Note. To get the forecasts, we have adjusted all the available prices to a common benchmark basis – the CFR China price for Australian 62% Fe fines.

The use of our own forecasting methods showed great results in Q1. The actual iron ore price was $147/t, which is only $1/t different from the level we suggested in the forecast published at the beginning of 2013 (investment companies’ forecast is 10% different from the fact). When a consensus forecast of independent industry analysts was prepared at the beginning of the year, only the then latest, January reports of investment banks were used.

In our April report we stressed the models based on non-linear dynamics methods proved largely unstable due to high volatility of actual iron ore prices in January-March, and so two price development scenarios were suggested: a basic one saying iron ore prices would stay high ($145-150/t) almost until the end of the year and an alternative one illustrating an iron ore price decrease in Q2-Q3.

Comparison of actual iron ore prices in the global market in Q2 with those predicted by Metal Expert Consulting in its April report shows the result of modelling is the overestimated probability of the basic scenario, whereas the alternative forecast is just $3/t different from the fact (the error of investment banks’ consensus forecast is 10%).

The modelling shows there are two ways the iron ore market can develop in the near future: the iron ore price dynamics will most probably be the same as the ones registered in 2010 (the basic scenario), still the situation seen last year may repeat itself as well (the alternative scenario). The probability is low other scenarios of iron ore price changes will unfold, including the one taken as the main scenario in the previous reports.

Our main scenario suggests that, after falling in April-June, global iron ore prices will be moving up slowly during Q3 to reach $130/t. They will largely stay at the level for the following 12 months – until the beginning of Q2 2014. In H2 2014 ore value will likely rise to $130-137/t CFR China. The iron ore price forecast for the medium and long terms has stayed at the previous level.

Under the alternative scenario, prices for iron ore, just as those for other raw materials and finished products, will go down within the framework of the employed non-linear dynamics method. As far as fundamental factors are concerned, the scenario may take place primarily in case of a hard landing of China’s economy and decline in purchases from abroad. This variant under the model suggests a gradual decrease in ore prices during the next six months: to $115/t CFR China in Q3, to $110/t in October-December. Higher volatility of iron ore prices is expected in 2014: a rise to $115/t in Q1, a subsequent drop to $105-107/t in Q2-Q3 and then growth to $114/t in Q4. Although the forecast is the closest to investment banks’ consensus forecast, the modelling shows it is not the main one.

In the alternative scenario, the medium-term iron ore price forecast should be revised. According to our estimates, the average price for ore in 2014 ($111/t CFR China) can be considered a local price bottom in this case, and in 2015 an increase to $120/t is likely. No adjustments have been made to the long-term forecast.

The graph below shows comparison of Metal Expert Consulting’s current price forecast for Australian iron ore fines (62% Fe) in the Chinese market with the level of prices that investment and industry analysts expect adjusted to this basis.